In a recent remarks to the Reuters Global Markets Forum, Rong Ren Goh, fixed‑income portfolio manager at Eastspring Investments, explained how a steepening Japanese yield curve is reshaping the classic yen‑funded carry trade. After the Bank of Japan’s surprise rate hike last week, the traditional strategy of borrowing cheap yen to buy higher‑yielding foreign assets is losing its appeal.
Why the reverse‑carry trade matters
Goh noted that the 30‑year Japanese government bond (JGB) now yields above 4%. When that bond is swapped into any major developed‑market currency – including the U.S. dollar – the FX‑hedged yield can be 100 to 200 basis points higher than the comparable domestic yield. This spread, he said, makes buying ultra‑long JGBs and hedging the yen back into dollars a potentially attractive play for overseas investors.
Changing expectations for Japanese policy
The Bank of Japan’s policy rate sits at 1.25% and markets anticipate a gradual rise toward roughly 2% over the coming months. As a result, the classic “no‑brainer” yen‑carry trade – borrowing yen at ultra‑low rates to invest in higher‑yielding assets abroad – is no longer a certainty. Goh expects the reverse‑carry approach to gain broader appeal as investors grow more confident that Japanese bond prices will stabilise after a sell‑off that began in 2022.
Market data supports the shift
Positioning data showed the net yen‑long position for the week ending September 15 jumped to its highest level since July 2025. The yen has also risen about 1.2% against the dollar month‑to‑date, reflecting a modest rebound after the BOJ’s 25‑basis‑point hike, which was accompanied by two dissenting votes that some interpreted as a dovish signal.
Yield curve dynamics
Goh highlighted that the gap between 2‑year and 30‑year JGB yields now exceeds 200 basis points, far wider than the roughly 80‑basis‑point average seen in other core developed markets where curves are flattening. This steep curve reduces the attractiveness of buying dollar‑denominated bonds for carry, even though the interest‑rate differential between the United States and Japan remains sizable.
Eastspring’s positioning
Eastspring, which manages $291 billion in assets, is adding shorter‑dated dollar‑denominated bonds while favouring the ultra‑long end of the Japanese curve. The firm is gradually building exposure through high‑quality corporate and Samurai bonds – yen‑denominated debt issued by foreign governments or companies – to capture additional credit spread over JGBs and enhance overall carry.
Outlook
According to Goh, the firm moved from an “underweight” stance on the yen at the start of 2026 to a more neutral position in August, as uncertainty over Japan’s fiscal and monetary policies eased and the risk of currency intervention became more tangible. He believes that as confidence in Japan’s bond market returns, the reverse‑carry trade will become a more widely used tool for investors seeking higher yields without taking on excessive currency risk.
For investors watching global fixed‑income markets, the evolving Japanese yield curve offers a clear signal: the era of ultra‑cheap yen funding may be ending, and a new strategy that leverages the steepening curve could provide a valuable source of return.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
